GLOBAL - Changes to China's pension system are very major and very serious, according to consultants Hewitt, and the Chinese government is examining a number of ways to meet its future pensions obligations.
Recently, a number of European fund managers have sealed partnerships ensuring a slice of the country’s potentially massive pensions markets, including UBS Global Asset Management, SG Asset Management, Skandia and Allianz Dresdner Asset Management.
Pillar I and II pension assets are currently estimated to amount to approximately RMB125bn (US$15bn), all in deposits and government bonds. These assets are managed by the local social security bureaus. Hewitt said the assets are however “sadly insufficient to meet the future financing obligations of the system.
The government is considering several possible ways to meet the pensions shortfall.” These include the levy of special taxes, a national lottery, the issue of recognition bonds, the sale of state owned assets and the launch of a Chinese Tracker Fund.”
It is estimated that the pension assets will increase at an annual rate of at least 30% for the next several years. According to a World Bank forecast, by the year 2030 the accumulated pension assets in China could reach US$1.8trn.
To allow pension funds to invest in equities is a controversial issue in China. One study sponsored by the Ministry of Labour and Social Security (MLSS) recommended that China’s pension funds be allowed to invest in the stock market, in order to produce a better return for the deficit stricken pension funds and help develop the growth of institutional investment.
The stock markets should be keen to welcome pension investment. The report suggested that the operation of China’s capital markets is maturing and that there are sufficient financial vehicles for pension investment.
Hewitt’s China expert Stuart Leckie said: “The changes to China’s pension system are very major and very serious. Provided high economic growth continues for many years, there is a chance that the new system will succeed. On the other hand, there are great risks and real difficulties.
“It must be emphasised that the pension system forms an integral part of the overall economic reforms and of China’s capital market development. There is no simple solution and in many ways China is in a race against time to make the pension reforms work.”
In China, the provincial governments manage Pillar I and Pillar II assets and sometimes the Pillar III Supplementary Pension Plans. Participants and employers have no say in the investment of their pension funds. The funds are simply invested in low-yield bank deposits and treasury bonds.
Leckie said: “In order to improve investment returns, investment options will have to be broadened and qualified fund management companies be invited to manage pension fund portfolios.”
By mid-2002, there were seventeen approved Chinese fund management companies managing about 50 closed-end funds and five open-ended funds with total assets of US$10bn.
However, the value of these investment funds only accounts for about 6% of the stock market by free float stock market capitalisation.
Regulations permitting investment of a portion of the pension fund assets into the stock markets may be unveiled in 2002.
A handful of industry heavyweights have begun trialling a so-called 'mid-life MOT', with positive initial results reported by all those involved.
The Pensions and Lifetime Savings Association (PLSA) has announced it will shrink its board by more than one-third as part of a governance overhaul to make it "agile and more appropriate".
Smaller FTSE 350 defined benefit (DB) schemes were nearly 15 percentage points less well-funded than larger schemes in 2017, according to a Goldman Sachs Asset Management (GSAM) analysis.